Mexico's economy slows as global downturn bites

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(Reuters) - Mexico's economic growth slowed in the third quarter to its lowest in 1-1/2 years and signs that domestic demand is weakening towards the end of the year back expectations that the central bank will leave interest rates steady.

Official data on Friday showed the economy grew 0.5 percent in the third quarter over the previous quarter, just below estimates in a Reuters poll.

Stronger manufacturing activity was dragged down by a slump in farming and a dip in services growth in September, allowing for seasonal factors.

But despite a deepening slowdown in Latin America's No. 2 economy , Mexico is still headed for an annual growth rate of nearly 4 percent this year, analysts said, more than double the expectation for regional rival Brazil .

Third-quarter economic growth compared with a year earlier was healthy at 3.3 percent even though it eased from an upwardly revised year-on-year 4.4 percent rate in the second quarter.

Surprisingly strong U.S. demand for Mexican made cars and televisions, as well as a recent breakthrough in Mexico's long-divided Congress on economic reforms, could help the economy maintain output despite a downturn in the global environment.

"If the manufacturing sector continues to hold its own, I don't think we're looking at a major slowdown," said UBS economist Rafael De La Fuente.

The data showed Mexico's agricultural sector contracted 0.55 percent, compared with the second quarter, while industry accelerated to grow by 0.71 percent. Growth in services, which makes up 65 percent of the economy, was the strongest of the three sectors at 0.73 percent but the pace slowed.

The total third-quarter expansion, the weakest since the first quarter of 2011, followed a downwardly revised expansion in the second quarter of 0.81 percent, the national statistics agency said.

The central bank has been eyeing deepening risks to growth from a global slowdown and policymakers have held benchmark interest rates steady at 4.5 percent despite a spike in inflation to a 2-1/2 year high.

Cooling consumer prices in October supports policymakers' insistence that the jump is temporary and analysts said Friday's data backed bets on steady borrowing costs ahead.

A separate report showed economic activity was flat in September, with a slight 0.02 percent contraction from the prior month as a sharp slump in farmingoutput and a contraction of 0.33 percent in services weighed.

The services sector includes retailers such as food franchise operator Alsea (ALSEA.MX ) and top chain Wal-Mart de Mexico (WALMEXV.MX ), which reported a 0.9 percent slump in sales in October from a year earlier.

"This is showing that the real economy started to decelerate more or less significantly since the third quarter, and this validates the central bank's decision to not hike rates," said Deutsche Bank economist Fernando Losada in New York.

Early fourth-quarter data have not been too negative: Mexican manufacturing sentiment rose in October while auto production hit a new record. Autoparts maker Nemak expects sales volumes to hold up in the fourth quarter and grow in 2013.

"We're confident that volume will be higher <in 2013>" Salvador Ramos, chief financial officer at Alfa (ALFAA.MX ) subsidiary Nemak, told analysts in a call last month after posting a 20 percent rise in third quarter sales volumes over 2011.

Mexican lawmakers this week approved a labor reform bill after 15 years of gridlock over major economic reforms. President-elect Enrique Pena Nieto has promised to push for tax and energy reforms after he takes office in December.

The trio of structural reforms could help raise Mexico's potential for growth, and Mexican businessmen at an annual conference earlier this week said such reforms could encourage more investment and help Mexico expand even if growth remains weak in the United States and Europe.

"For the first time the crisis is in the developed economies, and this gives us opportunities," Carlos Slim Domit, son of billionaire Carlos Slim and president of the board at conglomerate Grupo Carso (GCARSOA1.MX ) said at the meeting.